What Is a Fiduciary Bond?

Function

• In most states, a court-appointed fiduciary will have to take out a surety bond, though this requirement can be waived by the beneficiary if she is competent to do so. If the fiduciary subsequently fails in his duty to manage assets in the best interest of the beneficiary, a claim against the bond can be made to compensate for any losses or damages. The existence of the bond serves to ensure from the outset that the fiduciary is able to pay those damages.
  
  

Features

• The beneficiary of a fiduciary bond is the person on whose behalf the fiduciary is acting--though in some cases the state may be listed as the beneficiary, allowing the court to determine how to dispense of the proceeds of a claim. The surety (the underwriter who issues the bond) pays out the amount of a claim, if deemed valid by the court, and will then likely seek compensation from the fiduciary.
  
  

Size

• The size of a fiduciary bond will vary greatly depending on the value of the assets in question and the perceived risk. In the case of a will executor, it is standard in some states for the court to require a bond of 110 to 150 percent of the estate's estimated value, to cover potential costs and legal fees associated with obtaining judgment against the executor.
  
  

Types

• Other types of fiduciaries must also have insurance or other protection for their clients. Lawyers and financial planners often accept fiduciary responsibilities, and therefore usually have fiduciary liability insurance, which performs the same general function as a fiduciary bond. In the case of a large single client, such as a wealthy individual or corporation, a fidelity bond may be used.
  
  

Considerations

• If the fiduciary is a professional financial planner or attorney and covered by his own insurance, the cost of protection does not fall upon the beneficiary. In the case of a fiduciary bond--particularly where the fiduciary is appointed by a court to oversee assets--the cost of obtaining the bond may be taken directly from the assets under management. This is one reason why a beneficiary might elect to forgo the bond requirement, though this is not necessarily advisable.